KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs525
Back on track
Result highlights
- At Rs13.1 crore KSB Pumps' Q1CY2006 net profit is in line with our expectations. The quarter marked the recovery of growth in the company's top line, which in turn brought operating leverage into play and boosted its operating profit by 53%.
- The net sales for the quarter registered a growth of 10.3% to Rs96.6 crore driven by the execution of some high-value orders. In the previous quarters the company's top line was affected by a delay in the execution of these high-value orders.
- During the quarter the company's operating profit margin (OPM) improved sharply by 610 basis points on the back of a reduction in the raw material cost. The raw material cost as a percentage of the company's sales dropped from 46% earlier to 39% in Q1CY2006.
- Margins in both the businesses, ie of pumps and valves, improved remarkably. The earnings before interest and tax (EBIT) margin in the pump business grew by 560 basis points whereas that in the valve business expanded by 650 basis points.
- With a stable depreciation cost and a reduction in the tax rate, the net profit for the quarter jumped by 68% to Rs13.1 crore.
- KSB Pumps' Q1CY2006 results are in line with our expectations. In the absence of any top line growth, the stock has largely underperformed the broader market for the last six to nine months (it gave a negative return of 11.4% relative to the Sensex over this period). However given the recovery of growth in its top line in Q1CY2006 and the resulting momentum in its profitability, we believe the stock is all set for action and we expect it to outperform the broader market going forward.
With huge investments lined up in the user industries like power and in fluid handling industries like petrochemical and sugar, the outlook for KSB Pumps remains positive. We are introducing our CY2007 earnings estimate for KSB Pumps: Rs40 per share. At the current market price of Rs525, the stock is discounting its CY2007E earnings by 13x and CY2007E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 7.2x. We believe the stock's valuation is attractive as compared with that of its peers. We maintain our Buy recommendation on the stock with a price target of Rs650. At our price target the stock will be discounting its CY2007E earnings by 16x and EBIDTA by 9x.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs520
Current market price: Rs386
Price target revised to Rs520
Ratnamani Metals and Tubes Ltd (RMTL), we believe, will be one of the key beneficiaries of the massive investments being made in the power, refinery, petrochemical and oil & gas sectors currently. The company is witnessing strong order flows from these sectors. Its current order book position stands at Rs350 crore as compared with Rs200 crore in Q3FY2006. RMTL recently bagged a Rs90-crore order from Reliance Petroleum for the supply of SS pipes/CS pipes.
We expect RMTL to report revenue of Rs442.5 crore in FY2007 and of Rs525.7 crore in FY2008. That amounts to a compounded annual growth of 33.8% over FY2006-08. We expect the company to report a net profit of Rs37.5 crore in FY2007 and of Rs46.7 crore in FY2008. At the current market price of Rs386, the stock trades at 7.5x its FY2008E earnings and 5.0x its FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We are raising our price target for RMTL to Rs520, at which level the stock shall trade at 10x its FY2008E earnings and 6.3x its FY2008 EV/EBIDTA.
Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs900
Current market price: Rs808
Margin pressure ahead
Result highlights
- Satyam's consolidated revenues for Q4FY2006 grew by 3.8% quarter on quarter (qoq) and by 35.2% year on year (yoy) to Rs1,313.6 crore. The lower-than-expected revenue growth was largely due to the impact of the rupee appreciation. The consolidated volume growth of 6.8% was as per expectations and the revenues in the dollar terms grew by 5.4% on a stand-alone basis.
- The operating profit margin (OPM) improved by 60 basis points qoq to 25.5%—one of the highest in the past eight quarters. The overall improvement in the profitability was driven by the cumulative impact of the marginal improvement in the billing rates, the higher contribution from the offshore business and the improved performance of its loss making subsidiaries. The company's largest subsidiary Nipuna achieved cash break even during the fourth quarter.
- The consolidated earnings grew by 5.5% qoq and by 38.2% yoy to Rs284.6 crore, which were below the market expectations.
- On the full year basis, the consolidated revenues and earnings (excluding extraordinary items) grew by 36.1% (Rs4,793 crore) and by 38% (Rs982 crore) respectively. The OPM declined by 40 basis points to 24.3% over the year (lower than the guidance of a 50-basis-point decline given at the beginning of the year).
- The concerning factor was the muted growth guidance for the first quarter of FY2007 as well as for the full year FY2007. The management has given a growth guidance of 25.2-27.3% (Rs6,000-6,100 crore) in the revenues and the earnings guidance in the range of 21.4-23.4% (Rs37.1-37.4 per share) for FY2007. In the first quarter, the company expects a tepid sequential growth of 3.5-4% in the revenues and a decline of 1.5-1.9% in its earnings.
- The company has declared a bonus issue of 1:1 and a final dividend of 250% (or Rs5 per share).
- At the current price the scrip trades at 16.4x its FY2008 earnings. We maintain our Buy call on the stock with the target price of Rs900